The Central Bank of Ireland latest bulletin has found that the Irish economy ‘continues to perform well’, but warns that any increase in trade frictions between the UK and the rest of the EU ‘will generate a reduction in long-term living standards’.

The Central Bank’s second Quarterly Bulletin of 2018 has also found that:

• Economic growth driven by domestic activity and international growth, with positive contribution from both domestic demand and exports • As the economy gets closer to full employment, wages expected to rise at a faster pace • Nature of Irish economy means national and private finances must be resilient to unexpected events.

The Bulletin examines recent trends in the domestic economy and provides the Central Bank’s forecasts for the Irish economy and its views on domestic macro-economic policy issues.

Growth

The Central Bank’s latest Bulletin reports ‘small upward revisions’ to the projections for growth in 2018 and 2019.

“The economy is forecast to grow 4.8% for this year and 4.2% next year (up 0.4% and 0.3% respectively from the previous bulletin)”.

Unemployment

The report also highlights that unemployment is projected to average 5.6% in 2018 and 4.8% in 2019, this is down 0.1% and 0.4% respectively from the previous bulletin.

The bulletin forecast that an ‘additional 99,000’ will be in work by the end of 2019.

Spending

The Bulletin finds that underlying domestic demand increased by an estimated 2.6% in 2017 reflecting what the Central Bank believes is a ‘relatively modest increases in consumer spending, government consumption and underlying investment expenditure’. The Bank says a more positive outlook for both private consumption and investment spending over the forecast period should ‘support a pick-up in underlying domestic demand growth to 4.3 % on average in 2018 and 2019’.

Inflation

The report also finds a ‘gradual pick-up in headline inflation’, projected to average 0.8% in 2018 and 0.9% in 2019.

Further growth forecasts
Mark Cassidy, Director of Economics and Statistics for the Central Bank said that forecasts for further growth in earnings this year and next, combined with expectations of modest inflation, means rising wages ‘should translate in to higher real incomes and greater purchasing power for households’.

Risks

The Bulletin also outlines a number of risks to the projected growth of the Irish economy, including uncertainty around the implications of US tax reform, possible changes to the taxation of digital services and the risk of protectionist international trading measures.

Mr Cassidy added that while the forecasts are positive, he warned that ‘the highly open and therefore volatile nature of the Irish economy means we can take nothing for granted’.

“We have extensive links to other economies through trade, technology and finance and so unexpected events could see the growth in our economy thrown off course. As such, both the national and private finances need to be managed in a way that prepares for the unexpected, rather than relying excessively and unrealistically on Central Bank forecasts.”

Brexit

EU Referendum NI Declaration, June 24 2016,(Pic: C Hanna)

The Central Bank says it continues to highlight the risks posed by Brexit.

The report finds that if there is a substantial shift in the regime governing UK-EU trade, especially posed by the UK leaving the Single Market and Customs Union, a so-called ‘Hard Brexit, and with no alternative agreement decided, there will be a ‘costly diversion of resources’ to logistics and trade-processing systems.

“Should extra transit time and additional administrative burdens increase the costs of importing and exporting, both Irish consumers and exporters will be negatively impacted. New research on the effect of a hypothetical 10% depreciation in sterling is also published and shows a small fall in employment and wages as a result”.

-Mark Cassidy, Director of Economics and Statistics for the Central Bank

The report find that any increase in trade frictions between the UK and the rest of the EU ‘will generate
a reduction in long-term living standards, compared to the counterfactual of maintaining the status quo’.

The bulletin also states that since the Referendum in 2016, the only real effect so far of the vote has been the depreciation of Sterling against the euro since the referendum which has affected exporters to the UK but also ‘contributed to a decline in good prices in Ireland, given the important role of imports from the UK in the Irish consumption basket’.

However, the report says that recovery in domestic demand and the positive global economic conditions ‘have allowed the Irish economy to absorb the impact of Brexit so far’.

“As March 2019 draws closer, the resolutionof the current uncertainty about the natureof future UK-EU relations has the potentialto generate further economic and financialvolatility, especially if there is an increasinglikelihood of a harder version of Brexit”.

Exposed

The report finds that at a macroeconomic level, Ireland is ‘especially exposed’ compared to the remaining other member states of the EU, especially if there is a ‘downward shift’ in the prospects for UK economic growth or a further sustained depreciation in the value of Sterling.

“Furthermore, if there is a substantial shift inthe regime governing UK-EU trade, there willbe a costly diversion of resources to setting upnew logistics and trade-processing systems.If the costs of importing and exporting go up(including extra transit time and additionaladministrative burdens), the range of importedgoods available to Irish consumers and firmsmay shrink, while domestic firms will find itmore difficult to access export markets.”

-Central Bank of Ireland Quarterly Bulletin April 2018

Mark Cassidy did say that domestic demand and positive global economic conditions have seen Ireland absorb the impact of Brexit with ‘relatively little pain to date’.

However, he added that any obstacles to the way the UK currently trades with the EU is likely to generate a ‘reduction in long-term living standards in Ireland, reduce the range of imported goods available to Irish consumers and make it more difficult for domestic firms to export their goods’.

‘Greater costs than opportunities’

The Central Bank’s bulletin follows on from a recent 90-page report by the CBI, the UK equivalent of IBEC, which reveals ‘greater costs than opportunities if the UK moves from EU rules and regulations’.

The CBI study – ‘Smooth Operations’ -was compiled over a six month period and also says Brexit presents opportunities for rule changes in sectors such as agriculture, shipping and tourism that could benefit the British economy and consumers.

Supply Chains

Image: Andreas Wieland via Wikimedia Commons

However, the report adds that these opportunities for divergence are ‘vastly outweighed by the costs of deviating from rules necessary to ensure smooth access to the EU market’. Another finding from the report is that changes to rules in one sector have significant knock on effects for companies in other sectors and throughout supply chains.

“Where rules are fundamental to the trade or transport of goods, such as in the automotive, chemicals and life sciences sectors, remaining in lockstep with the EU is essential”.

Angela McGowan, CBI Northern Ireland Regional Director said that businesses in the North rely on ‘continued regulatory convergence’ to support all-island operations and supply chains.

“Individuals cross the border every day for meetings and commutes, as do goods and services. A significant amount of convergence with EU rules will be necessary for Northern Irish companies to continue operating seamlessly across the island of Ireland. Continued regulatory alignment will also be required to support the all-island Single Electricity Market – a key priority for local firms. “However, at the same time, it is not in the interest of Northern Irish businesses to fall significantly out of step when it comes to UK regulation and by doing so set up barriers in the Irish sea. Unfortunately, a balance that protects Northern Ireland’s economic prosperity has yet to be identified”.

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